In 1681, in partial repayment of a debt, Charles II of England granted William Penn a charter for what would become the Pennsylvania colony. Despite the royal charter, Penn bought the land from the local Lenape to be on good terms with the Native Americans and ensure peace for his colony. According to legend Penn made a treaty of friendship with Lenape chief Tammany under an elm tree at Shackamaxon, in what is now the city's Fishtown section. Penn named the city Philadelphia, which is Greek for brotherly love (from philos, "love" or "friendship", and adelphos, "brother").

As a Quaker, Penn had experienced religious persecution and wanted his colony to be a place where anyone could worship freely. This tolerance, far more than afforded by most other colonies, led to healthier relationships with the local Native tribes and fostered Philadelphia's rapid growth into America's most important city. Penn planned a city on the Delaware River to serve as a port and place for government. Hoping that Philadelphia would become more like an English rural town instead of a city, Penn laid out roads on a grid plan to keep houses and businesses spread far apart, allowing them to be surrounded by gardens and orchards. The city's inhabitants did not follow Penn's plans and crowded by the Delaware River and subdivided and resold their lots. Before Penn left Philadelphia for the last time, he issued the Charter of 1701 establishing Philadelphia as a city. The city soon established itself as an important trading center, poor at first, but with tolerable living conditions by the 1750s. Benjamin Franklin, a leading citizen of the time, helped improve city services and founded new ones, such as one of the American Colonies' first hospitals.